If you’re looking for a profitable portfolio of stocks that will offer the best of value and growth investing, try the growth at a reasonable price or GARP strategy. It helps an investor gain exposure to stocks that are undervalued and have impressive growth prospects.
However, one should not confuse GARP investing with the blend strategy. While the blend strategy promotes investment in both value and growth stocks, GARP investing requires both value and growth features in a single stock.
GARP Metrics – Mix of Growth & Value Metrics
The GARP approach prefers stocks that are priced below the market or any reasonable target determined by fundamental analysis. These stocks also have solid prospects in terms of cash flow, revenues, earnings per share (EPS) and so on.
Growth Metrics
Strong earnings growth history and impressive earnings prospects are the main concepts that GARP investors borrow from the growth investing strategy. However, instead of super-normal growth rates, pursuing stocks with a more stable and reasonable growth rate is also a tactic of GARP investors. Hence, growth rates between 10% and 20% are considered ideal under the GARP strategy.
Another growth metric that is considered by both growth and GARP investors is return on equity (ROE). GARP investors look for strong and higher ROE compared to the industry average to identify superior stocks. Moreover, stocks with positive cash flow find precedence under the GARP plan.
Value Metrics
GARP investing gives priority to one of the popular value metrics – price-to-earnings (P/E) ratio. Though this investing style picks stocks with higher P/E ratios compared to value investors, it avoids companies with extremely high P/E ratios. Moreover, the price-to-book value (P/B) ratio is also considered.
Using the GARP principle, we have run a screen to identify stocks that should offer solid returns in the near term.
Screening Parameters
Along with the criteria discussed in the above section, we have considered a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy).
Last 5-year EPS & projected 3–5 year EPS growth rates between 10% and 20% (Strong EPS growth history and prospects ensure improving business.)
ROE (over the past 12 months) greater than the industry average (Higher ROE compared to the industry average indicates superior stocks.)
P/E and P/B ratios less than M-industry average (P/E and P/B ratios less than that of the industry indicate that the stocks are undervalued.)
These few criteria have narrowed down the universe of over 7,700 stocks to only nine.
Here are seven of the nine stocks that made it through the screen:
GARP Stocks That Will Maximize Your Portfolio Returns: VMWare, Inc. (VMW)
VMware, Inc. (NYSE:VMW) provides virtualization solutions from the desktop to the data center.
The company delivered an average four-quarter positive earnings surprise of 3.8%.
It sports a Zacks Rank #1.
GARP Stocks That Will Maximize Your Portfolio Returns: Petmed Express Inc (PETS)
PetMed Express Inc (NASDAQ:PETS) is a leading nationwide pet pharmacy.
This Zacks Rank #2 stock came up with an average four-quarter earnings surprise of 32.9%.
GARP Stocks That Will Maximize Your Portfolio Returns: Merit Medical Systems, Inc. (MMSI)
Merit Medical Systems, Inc. (NASDAQ:MMSI) set out to build the world’s most customer-focused healthcare company by understanding customers’ needs, and innovating and delivering a diverse range of products that improve the lives of people, families, and communities throughout the world.
The company delivered an average four-quarter positive earnings surprise of 13.9%. It has a Zacks Rank #2.
GARP Stocks That Will Maximize Your Portfolio Returns: Dollar General Corp. (DG)
Dollar General Corp. (NYSE:DG) is a discount retailer in the United States.
This Zacks Rank #1 stock surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while matching the same on one occasion, delivering a positive average earnings surprise of 2.3%.
GARP Stocks That Will Maximize Your Portfolio Returns: inTEST Corporation (INTT)
inTEST Corporation (NYSEAMERICAN:INTT) is an independent designer, manufacturer and marketer of ATE interface solutions and temperature management products, which are used by semiconductor manufacturers to perform final testing of integrated circuits and wafers.
This Zacks Rank #2 stock delivered a positive earnings surprise of 121.4% last quarter.
GARP Stocks That Will Maximize Your Portfolio Returns: EPAM Systems Inc (EPAM)
EPAM Systems Inc (NYSE:EPAM) is an IT services provider, engaged in providing software product development services, software engineering and custom development solutions.
This Zacks Rank #2 stock delivered a positive earnings surprise of 4.1% last quarter.
GARP Stocks That Will Maximize Your Portfolio Returns: SS&C Technologies Holdings, Inc. (SSNC)
SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) delivers investment and financial management software and related services focused exclusively on the financial services industry. The Zacks Rank #2 stock delivered a positive earnings surprise of 1.9% last quarter.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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